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Ohio National Class Action Lawsuit: Morgan Stanley Gets Special Treatment While Others Suffer Heavy Annuities Trailing Commission Losses

By Rita Raagas De Ramos November 7, 2018

Up in arms over Ohio National Financial Services' decision to terminate variable annuities selling agreements with broker-dealers and stop paying trailing commissions, an LPL Financial broker has brought a class action suit against the firm. The suit reveals that while some broker-dealer groups may be suffering heavy losses in annuities trailing commissions, Morgan Stanley is still getting preferential treatment from Ohio National.

Lawyers of Lance Browning filed the class action suit against The Ohio National Life Insurance Company, Ohio National Life Insurance Company and Ohio National Equities Tuesday before the U.S. District Court Southern District of Ohio Western Division.

“Ohio National is unlawfully trying to change the rules after the game has already started,” according to the complaint. Browning is represented by Meyer Wilson – a law firm dedicated solely to investor claims and class and mass action suits – and Carlile, Patchen & Murphy.

FA-IQ reached out to Ohio National for this article but did not receive a reply as of this writing.

On September 28, Ohio National sent a letter to broker-dealer firms saying it was terminating its variable annuities selling agreements with them effective December 12 and that it would no longer pay trailing commissions stemming from annuities already in existence, according to the complaint.

The class action suit is seeking an injunction to prevent Ohio National from terminating its obligations to Browning and other similarly situated individuals who acted as representatives in the sale of the annuities or solicited the sale. The complaint notes that the members or beneficiaries of the class action suit are “likely in the thousands” and their identities can be determined through Ohio National or broker-dealer records.

Some broker groups are losing $300,000 to $400,000 a year!
Dennis Concilla
Carlile, Patchen & Murphy

The class action suit also wants to obtain a declaratory relief resolving Ohio National’s future obligations to the selling agreements.

While registered representatives like Browning are not named parties in the selling agreements between Ohio National and the broker-dealer firms, the agreement “makes clear they are the intended beneficiaries of the contract,” according to the complaint.

The issuance of these policies involves four parties, according to the complaint:

  • Ohio National as the issuer
  • a broker-dealer firm that has a selling agreement with Ohio National, permitting it to sell the policies
  • a securities representative who advises the customer about the policy
  • a customer who purchases the policy.

Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group, tells FA-IQ that Ohio National issued billions of dollars worth of variable annuity policies with guaranteed income benefit riders. Concilla is among the lawyers representing Browning.

According to Ohio National’s 2017 annual report to policy holders, the firm had $24.9 billion in annuity assets as of last year.

“Simple math tells you that’s worth a tremendous amount of trailing commissions,” Concilla says, depending on how many basis points in trailing commissions in specified in the selling agreements.

Browning has sold more than 100 Ohio National annuities that have not yet been surrendered or annuitized by customers, according to the complaint.

That’s a “significant part of his business” that has generated around $89,000 in annual trailing commissions for Browning for many years, the complaint adds.

Incredibly, Ohio National has not even implemented this unfair and improper policy evenly to all broker-dealers. It’s continuing to pay trailing commissions to its own captive broker-dealer, Ohio National Equities and Morgan Stanley.
Class action complaint

Concilla says he has spoken to individual production groups of brokers who say “they are losing upwards of $300,000 to $400,000 a year” in trailing commissions.

“Ohio National has induced the sale of its policies by promising annual, recurring commissions to the broker-dealers and, by extension, the securities representatives,” the complaint says. “Customers have purchased these policies believing that they will be able to rely on their trusted securities representatives to advise them on how to manage the investments in the policy and whether or when to annuitize or surrender the policy.”

Despite making those promises, “Ohio National has announced that it does not intend to hold up its end of the bargain – it is refusing to pay the promised recurring commissions, and thereby effectively cutting off customers from receiving financial advice about these policies from their trusted financial advisors,” according to the complaint.

The complaint notes that Browning is one of thousands of licensed securities representatives who have sold variable annuities to customers nationwide that feature a guaranteed minimum income benefit or so-called GMIB rider, offered by the three Ohio National Companies listed as defendants in the class action suit.

In return for promoting, selling and servicing the variable annuities, the broker-dealer firms and their affiliated securities representatives receive commissions, including trailing commissions yearly until the annuities are surrendered or annuitized, according to the complaint.

“While Ohio National has the right to discontinue future sales of the annuities, it may not unilaterally terminate its obligation to pay trailing commissions on existing annuities,” the complaint says.

“Perhaps even worse, Ohio National’s decision to stop paying trailing commissions for which it is already obligated will not even reduce the expenses for investors. The costs of the annuities will not go down one penny. Rather, instead of paying trailing commissions to the broker-dealers and their securities representatives, Ohio National has decided to simply pocket that money itself instead,” the complaint adds.

The complaint also calls out Ohio National for exempting two broker-dealer firms from the non-payment of traling commissions: Ohio National Equities and Morgan Stanley.

“Incredibly, Ohio National has not even implemented this unfair and improper policy evenly across the board as to all broker-dealers,” according to the complaint. “It is continuing to pay trailing commissions to its own captive broker-dealer, Ohio National Equities, Inc. Furthermore, Ohio National is continuing to pay trailing commissions to broker-dealer Morgan Stanley Smith Barney LLC and its securities representatives.”

It is understood that Morgan Stanley will continue receiving its trailing commissions because of the wording of Ohio National’s selling agreement with the wirehouse. Morgan Stanley could not be reached as of this writing.

Dennis Concilla

FA-IQ reached out to Finra for comments on Ohio National’s decision terminate its variable annuities selling agreements with broker-dealer firms and stop paying trailing commissions; the class action suit; and the impact of these developments on the broker-dealer industry and consumers. Finra declined to comment for this article.

At least one other lawsuit has been brought against the same defendants in this case. Commonwealth Equity Services filed its complaint Monday before the U.S. District Court District of Massachusetts. Among other things, that complaint is seeking a declaration that Ohio National is obligated to pay the annuities trailing commissions.

Beyond the variable annuities of Ohio National, the firm’s actions have “fairly serious ramifications” on the broker-dealer industry and the customers, according to Carlile, Patchen & Murphy’s Concilla.

Concilla says brokers have questions about the reliability of selling agreements with variable annuities providers.

“They sold these products with the belief that it was in the best interest of their clients and they are going to be compensated for not selling other things while their clients’ assets are tied up in these products,” he says.

Concilla notes that the trailing commissions are the broker’s compensation for “assisting their clients in selecting annuities, in selecting the sub-accounts, in advising them when it’s time to start drawing money or to annuitize, etcetera.”

Customers – particularly “average” investors who don’t have a significant amount of other assets in their brokerage accounts – will lose the advice of their brokers who will no longer be paid trailing commissions, Concilla says.

Concilla notes that it’s likely that brokers who manage other big ticket or important clients with other assets in their accounts will keep providing these clients their variable annuities services for free. To that end, he says Ohio National is telling brokers “they can continue to access the product and provide services but they just won’t get paid for it.”

According to an October 26 filing with the SEC, Ohio National says it will offer to buy back some variable annuities with guaranteed minimum income benefit riders from November 12 to February 11.